Tag Archives: equity

Better Way to Think About Leadership

In “Colin’s Kaizen Corner”–a 26-part learning series, I explain the principles of kaizen, lean manufacturing and respect for people — each a cornerstone for transforming a culture, improving productivity and implementing a continuous improvement program.

In addition, each week I’ll digest a principle of kaizen to achieve these outcomes, explain what we’re doing today, what happens when we get it wrong, what happens when we do it better and why it matters today more than ever, to stay on a continuous journey of improvement.

The value of a new corporate improvement or strategic acquisition is easily estimated for most investors. Calculating future anticipated cash flows, measured over a specific period in today’s dollars, yields the improvement’s net present value.

But leadership isn’t so easily measured, nor is the future value that an effective or ineffective leader begets.

Sure, tools like return on investment (ROI) and earnings before interest and taxes (EBIT) help us measure whether executives are investing money wisely to maximize dollars that may sustain the future of the company. But the tools are based solely on what we know, not what we don’t. Of course, there’s no way to value something you don’t know exists; that is, until someone discovers it does.

Valuing human productivity and the intrinsic satisfaction employees receive from being able to do their jobs well doesn’t show up anywhere on even the most complex of income statements. Neither does the value created or destroyed from a lifetime of leaders who either nurtured man’s most important attributes, or ruined them altogether.

The problem is that ROI, EBIT and similar tools do nothing to help place a value on, and encourage, man’s discovery of the unknown. To identify and fix that which isn’t broken. To look outside the box.

It is this intrinsic curiosity-our yearning for learning-that makes us unique within the mammalian class. We aren’t just members of a “clade of endothermic amniotes distinguished from reptiles and birds by the possession of hair, three middle ear bones, mammary glands and a neocortex” (as Wikipedia defines mammals). Nor do we just survive on instinct as other mammals do.

We’re provided with daily opportunities to detect and correct errors in our thinking. Our intrinsic yearning for learning constantly encourages us to explore that which we think we understand.

Man has the choice to continuously improve upon his own knowledge base, or demand that others accept pre-determined answers-a radical difference in leadership style between those who lead by kaizen and those who lead by control.

Like scientific discovery, effective leadership creates for the curious a culturally acceptable and true belief in the ignorance of experts.

But man’s creativity and curiosity still don’t show up as direct value or loss through the eyes of a customer. And they’re certainly not measurable; that is, without the proper tools.

And that’s why ROI and EBIT — the preferred tools for modern investing and modern valuation — are precisely the wrong tools for measuring human productivity, the value of an acquisition and the value of a business itself.

For if human capacity is assumed to be x, and man’s true capacity is actually y, without regular corporate and personal discovery neither man nor machine gets its best chance at material improvement.

Using ROI and EBIT, we’ve created a culture of mind-numbed business robots. Really smart children, teenagers and adults, being robbed of their intrinsic motivation because of diminishing human valuations. It’s as if they were rusting old farm equipment, with just a few years of straight line depreciation left on an otherwise highly appreciable asset.

Nothing could be further from the truth. People have exponential value.

Years of poor parenting, leadership, primary education systems and business school professors have finally brought our chickens home to roost. In fact, as Dr. W. Edwards Deming said nearly 50 years ago, if the U.S. wanted to destroy a country, then all it had to do was export its business management and leadership practices.

Today, we know the enemy even better, and it is still us.

An enemy where large lots of wasteful activities exist, yet few executives are visible to help employees improve; an enemy where waste prevents employees from doing their jobs with purpose, joy, accuracy and speed.

Sadly, more executives today than ever before are searching for value within a spreadsheet or income statement. We fail one another when we refuse to look for loss at the precise location where value is created and where crimes of waste are most frequently reported.

To create a better opportunity for human development and true personal productivity, let’s turn to respect. Because respect leads productivity by a long shot as the single most important aspect of man’s institutional existence.

Let’s provide an institutional daily dose of improvement that is eloquently simple: Continuously help me change, and always help me make it for the better. Because good change nurtures and replenishes my mind, heart, body and soul‘s constant need for continuous improvement.

By appreciating systems thinking and human psychology-only two parts of a four-part system, but integral components nonetheless-we can easily find opportunities for mankind to improve.

An entirely new system, which identifies what value means to customers rather than stakeholders, can easily bring about a different culture. A culture that even our most seasoned leaders currently don’t believe in, currently can’t measure and clearly don’t currently understand. A culture that should be helping everyone improve that which we cannot see or measure.

Stocks: The Many Faces of Volatility

The current year has been characterized by increasing daily volatility in financial asset prices. This is occurring in bonds as well as stocks. In fact, through the first six months of this year, the major equity markets have been trading within a narrow price band, back and forth, back and forth. Enough to induce seasickness among the investment community.

The S&P 500 ended 2014 at 2058. On June 30, 2015, the S&P closed at 2063. In other words, the S&P spent six months going up all of five points, or 0.2%. Yet if we look at the daily change in the S&P price, the S&P actually traveled 1,544 points, daily closing price to daily closing price, in the first six months of the year. Dramamine, anyone?

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Price volatility seems to have increased, but point-to-point percentage price moves have actually been very small. When looked at within the context of an entire bull market cycle, a 3.5% price move in either direction is close to a rounding error. This is the face of volatility we have experienced over the first half of 2015. Not quite as scary as is portrayed in the media, right?

In one sense, what we have really experienced this year is what is termed a “sideways correction.”

Financial markets can correct in any number of ways. We usually think of a correction in prices as a meaningful drop. That is certainly one form of a correction, and never much fun. Markets can also correct in sideways fashion. In a sideways correction, the markets go back and forth, often waiting for fundamentals of the economy and corporate earnings to catch up with prices that have already moved. The markets are digesting prior gains. Time for a “time out.”

At least so far, this is what appears to be occurring this year. Make no mistake about it, sideways corrections heighten the perception of price volatility. That’s why it is so important to step away from the day to day and look at longer-term market character. A key danger for investors is allowing day-to-day price volatility to influence emotions, and heightened emotions to influence investment decision making.

Two issues we do believe to be very important at this stage of the market cycle are safety and liquidity. We live in a world where central banks are openly debasing their currencies, where government balance sheets are deteriorating, where governments (to greater or lesser degrees) are increasing the hunt for taxes and where cash left in certain banking systems is being charged a fee (negative interest rates) just to sit. None of these actions is friendly to capital, which is why we see so much global capital on the move.

It’s simply seeking safety and liquidity. Is that too much to ask?

To understand where the money may go, it’s important to look at the size and character of major global asset classes. In the chart below, we look at real estate and bond (credit) and stock markets. We’ve additionally shown the global money supply and gold.

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One of the key takeaways from this data is that the global credit/bond market is about 2.5 times as large as the global equity market. We have expressed our longer-term concern over bonds, especially government bonds. After 35 years of a bull market in bonds, will we have another 35 years of such good fortune? Not a chance. With interest rates at generational lows, the 35-year bond bull market isn’t in the final innings; it’s already in extra innings, thanks to the money printing antics of global central banks. So as we think ahead, we need to contemplate a very important question. What happens to this $160 trillion-plus investment in the global bond market when the 35-year bond bull market breathes its last and the downside begins?

One answer is that some of this capital will go to what is termed “money heaven.” It will never be seen again; it will simply be lost. Another possible outcome is that the money reallocates to an alternative asset class. Could 5% of the total bond market move to gold? Probably not, as this is a sum larger than total global gold holdings. Will it move to real estate? Potentially, but real estate is already the largest asset class in nominal dollar size globally. Could it reallocate to stocks? This is another potential outcome. Think about pension funds that are not only underfunded but have specific rate-of-return mandates. Can they stand there and watch their bond holdings decline? Never. They will be forced to sell bonds and reallocate the proceeds. The question is where. Other large institutional investors face the same issue. Equities may be a key repository in a world where global capital is seeking safety and liquidity. Again, only a potential outcome.

We simply need to watch the movement of global capital and how that is expressed in the forward price of these key global asset classes. Watching where the S&P ultimately moves out of this currently tight trading range seen this year will be very important. It will be a signal as to where global capital is moving at the margin among the major global assets classes.

Checking our emotions at the door is essential. Not getting caught up or emotionally influenced in the up and down of day-to-day price movement is essential. Putting price volatility and market movement into much broader perspective allows us to step back and see the larger global picture of capital movement.

These are the important issues, not where the S&P closes tomorrow, or the next day. Or, for that matter, the day after that.

Unclaimed Funds Can Lead to Data Breaches

When it comes to privacy, not all states are alike. This was confirmed yet again in the 50 State Compendium of Unclaimed Property Practices we compiled. The compendium ranks the amount of personal data that state treasuries expose during the process by which individuals can collect unclaimed funds. The data exposed can provide fraudsters with a crime exacta: claiming money that no one will ever miss and gathering various nuggets of personal data that can help facilitate other types of identity theft. The takeaway: Some states provide way too much data to anyone who is in the business of exploiting consumer information.

For those who take their privacy seriously, the baseline of our compendium—inclusion in a list of people with unclaimed funds or property—may in itself be unacceptable. For others, finding their name on an unclaimed property list isn’t a huge deal. In fact, two people on our team found unclaimed property in the New York database (I was one of them) while putting together the 50-state compendium, and there were no panic attacks.

Free IDT911 white paper: Breach, Privacy and Cyber Coverages: Fact and Fiction

That said, there is a reason to feel uncomfortable—or even outright concerned—to find your name on a list of people with unclaimed property. After all, you didn’t give anyone permission to put it there. The way a person manages her affairs (or doesn’t) should not be searchable on a public database like a scarlet letter just waiting to be publicized.

Then there’s the more practical reason that it matters. Identity thieves rely on sloppiness. Scams thrive where there is a lack of vigilance (lamentably, a lifestyle choice for many Americans despite the rise of identity-related crimes). The crux of the problem when it comes to reporting unclaimed property: It’s impossible to be guarded and careful about something you don’t even know exists, and, of course, it’s much easier to steal something if you know that it does.

The worst of the state unclaimed property databases provide a target-rich environment for thieves interested in grabbing the more than $58 billion in unclaimed funds held by agencies at the state level across the country.

States’ response to questions about public database

When we asked for comment from the eight states that received the worst rating in our compendium—California, Hawaii, Indiana, Iowa, Nevada, South Dakota, Texas and Wisconsin—five replied. In an effort to continue the dialogue around this all-too-important topic, here are a few of the responses from the states:

— California said: “The California state controller has a fraud detection unit that takes proactive measures to ensure property is returned to the rightful owners. We have no evidence that the limited online information leads to fraud.”

The “limited online information” available to the public on the California database provides name, street addresses, the company that held the unclaimed funds and the exact amount owed unless the property is something with a movable valuation like equity or commodities. To give just one example, we found a $50 credit at Tiffany associated with a very public figure. We were able to verify it because the address listed in the California database had been referenced in a New York Times article about the person of interest. Just those data points could be used by a scammer to trick Tiffany or the owner of the unclaimed property (or the owner’s representatives) into handing over more information (to be used elsewhere in the commission of fraud) or money (a finder’s fee is a common ruse) or both.

This policy seems somewhat at odds with California’s well-earned reputation as one of the most consumer-friendly states in the nation when it comes to data privacy and security.

— Hawaii’s response: “We carefully evaluated the amount and type of information to be provided and consulted with our legal counsel to ensure that no sensitive personal information was being provided.”

My response: Define “sensitive.” These days, name, address and email address (reflect upon the millions of these that are “out there” in the wake of the Target and Home Depot breaches) are all scammers need to start exploiting your identity. The more information they have, the more opportunities they can create, leveraging that information, to get more until they have enough to access your available credit or financial accounts.

— Indiana’s response was thoughtful. “By providing the public record, initially we are hoping to eliminate the use of a finder, which can charge up to 10% of the property amount. Providing the claimant the information up front, they are more likely to use our service for free. That being said, we are highly aware of the fraud issue and, as you may know, Indiana is the only state in which the Unclaimed Property Division falls under the Attorney General’s office. This works to our advantage in that we have an entire investigative division in-house and specific to unclaimed property. In addition, we also have a proactive team that works to reach out to rightful owners directly on higher-dollar claims to reduce fraud and to ensure those large dollar amounts are reaching the rightful owners.”

Protect and serve should be the goal

While Indiana has the right idea, the state still provides too much information. The concept here is to protect and serve—something the current system of unclaimed property databases currently does not do.

The methodology used in the compendium was quite simple: The less information a state provided, the better its ranking. Four stars was the best rating—it went to states that provided only a name and city or ZIP code—and one star was the worst, awarded to states that disclosed name, street address, property type, property holder and exact amount owed.

In the majority of states in the U.S., the current approach to unclaimed funds doesn’t appear to be calibrated to protect consumers during this ever-growing epidemic of identity theft and cyber fraud. The hit parade of data breaches over the past few years—Target, Home Depot, Sony Pictures, Anthem and, most recently, the Office of Personnel Management—provides a case-by-case view of the evolution of cybercrime. Whether access was achieved by malware embedded in a spear-phishing email or came by way of an intentionally infected vendor, the ingenuity of fraudsters continues apace, and it doesn’t apply solely to mega databases. Identity thieves make a living looking for exploitable mistakes. The 50 State Compendium provides a state-by-state look at mistakes just waiting to be converted by fraudsters into crimes.

The best way to keep your name off those lists: Stay on top of your finances, cash your checks and keep tabs on your assets. (And check your credit reports regularly to spot signs of identity fraud. You can get your free credit reports every year from the major credit reporting agencies, and you can get a free credit report summary from Credit.com every month for a more frequent overview.) In the meantime, states need to re-evaluate the best practices for getting unclaimed funds to consumers. One possibility may be to create a search process that can only be initiated by the consumer submitting his name and city (or cities) on a secure government website.

workers' comp

Workers’ Comp: Where the Smart Money Is…

What’s with all the investor interest in workers’ comp services? There are several dozen private equity (PE) firms looking hard at the workers’ comp services business today, with many pursuing acquisitions of companies large and small. While their approaches, priorities and goals may differ slightly, there are several reasons why their attention will likely persist for some time.

First, there are a lot more investment firms out there these days than five or 10 years ago, with a lot more capital to invest. That means lots of smart people with big bank accounts are looking to park millions of dollars, which means there’s a lot of competition for attractive companies.

Second, some comp services companies have gotten pretty big, with earnings in the tens of millions of dollars and revenues north of $200 million. Finding potential targets, conducting due diligence and going through the deal process takes about the same amount of time and staff if it is a $50 million or $350 million deal. Obviously, PE firms would rather do a couple or three large deals than a bunch of smaller ones as it’s a lot less work on the front end, and a lot less to manage and oversee after the deal is done. And PE firms just seem to like companies with more revenue.

Third, what used to be considered a problem — the regulatory risk associated with a workers’ comp company — is now seen as a strength when compared to a non-work comp healthcare firm. Investors see the 51 regulatory bodies affecting workers’ comp as creating far less risk than the single regulator driving Medicare, Medicaid and most health insurance programs. Investors don’t know what’s going to come out of CMS as reform is implemented, so PE firms are hedging their bets by going where, in a worst-case scenario, they’re going to get hurt in one or two big states.

Fourth, there are a lot of inefficiencies, stodgy business practices and just plain poorly run sectors of the workers’ comp business. PE firms make a lot of money by stripping out inefficiencies, delivering better performance, streamlining workflows and processes, removing cost and delivering more value. Anyone who’s spent any time at all in work comp knows that there are a plethora of opportunities out there to do all of these.

Bill processing, analytically driven medical management, intelligent utilization review, provider clinics, complex case services, IMEs/peer review and chronic pain management and addiction services are just a few sectors where there’s a ton of opportunity.

Interestingly, no PE firm has yet taken advantage of the biggest opportunity in workers’ comp. That opportunity is to buy a comp carrier/TPA, rationalize the claims and medical management process, write workers’ comp insurance and make huge profits by controlling medical costs and delivering much better outcomes. The investment executives I’ve spoken with about this seem to be afraid of the risk; what if they do it wrong, or get a bunch of bad claims, or whatever?

To which I respond: You can’t do it any worse than many of the current comp carriers, so what are you waiting for?